Percheron Hill LLC: Small Business Articles

Forming a Professional Limited Liability Company

Limited liability companies offer small businesses and their owners a wonderful way to minimize liability and their taxes. But the rules for when and how a professional forms a limited liability company are complicated. To make the process smoother and less burdensome, use these tips:

Tip #1: Verify Your Profession Needs (and Can Form) a Professional Limited Liability Company

State law determines whether individuals and firms practicing your particular profession in your state can form a limited liability company, or LLC.

State law also determines whether people in your profession need to form a regular limited liability company or a professional limited liability company.

Accordingly, the first step in forming an LLC is to determine whether you even can form a limited liability company and (if you can) whether you need to form regular LLC or professional LLC.

You should be able to determine this by calling the state agency or affiliated organization that grants your professional license. For example, if you're an attorney, you probably call the state bar association. And if you're a certified public accountant, you probably call the state board of accountancy.

You can also look at what other professionals--doctors, dentists, and so forth--in your state do. But be careful about assuming that what other people are doing is correct. Sloppy professionals (sadly) regularly form an LLC when by law they're supposed to form a PLLC. This mistake, by the way, probably destroys the liability protection that the LLC offers.

Note: I've got more information about the technical details of the PLLC issue at my LLCs Explained webdite: Click here for that information.

Tip #2: Clearly Identify Your LLC as a Professional Limited Liability Company

Typically, you form a professional limited liability company in the same way as you form an LLC. You simply file articles of organization or articles of formation with the secretary of state.

One difference between forming a professional limited liability company and forming a regular limited liability company concerns the name, however. Any limited liability company needs to clearly identify itself as a "limited liability" entity.

A regular LLC needs to clearly and plainly identify itself using an acronym like "LLC" as part of the entity name, for example. Or by using a phrase like, "limited liability company," as part of the name.

Naming a professional limited liability company works similarly--but you need to use an appropriate professional LLC acronym or phrase. In most states, the acronym PLLC works. However, all states that allow professional limited liability companies also let you use other acronyms and phrases, such as "Professional Limited Liability Company," "Professional Limited Liability Co.," or the abbreviation "P.L.L.C."

Tip #3: Verify LLC Owners Hold Appropriate Professional Licenses

A quick, probably obvious point: In general, the owners of a professional limited liability company need to hold appropriate professional licenses to be members in the professional LLC.

For example, a PLLC that practices public accounting needs its owners to hold professional licenses to practice public accounting. A PLLC that practices law needs its owners to be members of the state bar.

Note: In same states for some professions, a PLLC may be able to have minority owners who don't hold professional licenses. Check with the appropriate state agency for more information.

Tip #4: Verify You Follow Any Other Naming Rules for Your Profession

In same states for same professions, the licensing state agency also has other naming requirements for professional limited liability companies. For example, the name of the individual professional or professionals may need to be used in the PLLC name.

You'll want to check out this possibility for your state for your profession--and then (obviously) follow the rules prescribed.

Tip #5: Secure Professional Liability Insurance, If Required

A final and often missed PLLC setup step needs to be considered--the step of securing professional liability insurance.

Some states require that professional limited liability companies acquire a professional liability insurance policy, bond or other evidence of financial responsibility in order to get liability protection from the PLLC form. The professional limited liability company, for example, might commonly be required to obtain and maintain at least one million dollars of insurance or bonding coverage.

About the author: Seattle CPA Stephen L. Nelson provides small business tax planning and accounting services.